DALLAS – The University of Arizona plans to take advantage of continuing low interest rates with a $169.6 million advance refunding of bonds issued from 2007 to 2009.
The negotiated deal through senior manager Citi is expected to price Thursday.
RBC Capital Markets managing director Kurt Freund, UA's financial advisor, said the university estimates net present value savings will be in the range of $17 million to $19 million, or 9.2% to 10.6% of the par amount of bonds expected to be refinanced.
"The University expects the sale will be well received given current market conditions and the fact that the University has not come to market recently and there has been little supply of high credit quality Arizona paper," Freund said. "Expectations are that demand will be strong from both professional retail buyers as well as institutional investors."
With final maturities in 2035, the bonds carry ratings of Aa2 from Moody's Investors Service and AA-minus from Standard & Poor's. Outlooks are stable.
Municipal bond volume for the week is estimated at $6.8 billion, nearly double the $3.6 billion in the past week, according to Thomson Reuters. The total includes $4.4 billion of negotiated deals and $2.4 billion of competitive sales. Another university seeking bond buyers is the University of North Carolina, which is pricing $401 million of triple-A-rated taxable series this week.
Like Arizona's other universities, UA in Tucson has managed to overcome declining state support in recent years. Although Arizona is slowly recovering from the 2008 recession, Gov. Doug Ducey and state lawmakers have maintained a relatively austere budget.
For UA, state support represents just 15% of total revenue, and that is down 15% since 2010. For fiscal year 2016, the state instituted a 13% cut in operating appropriations.
Compared to other states, Arizona holds the distinction of making the deepest cuts to higher education since the 2008 financial crisis.
According to the Center on Budget and Policy Priorities, Arizona is spending 47% less this year per college student than it did in 2008, adjusted for inflation. That's a larger percentage cut than any other state, equating to $3,053 less annually per student.
Louisiana is next, spending 42% less. The national average was a 20% cut.
The cuts did not extend to state reimbursed debt service for research infrastructure certificates of participation, according to Moody's. UA continues to have $79 million of state appropriations deferred each year, then made whole in the following October.
With 43,335 full-time students, UA operates on a $1.9 billion annual budget.
After this issue, UA will have $1.55 billion of debt outstanding based on fiscal 2015 audited totals, S&P says.
That includes $769 million of system revenue bonds, $354.8 million of certificates of participations, $386.4 million of SPEED (Stimulus Plan for Economic and Educational Development) debt, and about $41.7 million of capital leases.
The state-supported debt is about 30%, or about $465 million. Total debt service is front-loaded, with pro forma maximum annual debt service of $123 million in 2018.
The Arizona Legislature passed the SPEED initiative in 2008 to fund as much as $800 million of construction projects at the state's three universities: UA, Arizona State and University of Northern Arizona.
As much as 80% of the annual payments on SPEED bonds are funded by the state lottery, and the universities pay the rest. The SPEED bonds do not have a lien on actual lottery revenues, according to S&P. The university pays any debt service beyond lottery proceeds from its unrestricted general funds.
If those funds are insufficient, there is a subordinate pledge of its system revenues.
UA sold its first $147 million of SPEED bonds in 2010.
UA's oldest outstanding bonds are from a 1992 issue, with about $3.3 million outstanding. UA's most recent bonds were about $118 million issued in April 2015.
The university plans to issue an additional $11 million debt for its South Stadium Parking Structure and $163 million for the Simulation Inter-Professional Healthcare Education and Research facility in fall 2016, according to S&P.
The university shed one drag on its credit rating in 2014, when it entered a 15-year alliance with Banner Health to operate the University of Arizona Health Network, including the University of Arizona Hospital.
Under the terms of the 15-year agreement Banner has become the medical school's primary clinical partner. Banner funded a $300 million Academic Enhancement Fund that is providing a guaranteed $20 million in annual support to UA over a 30-year period. The funds are restricted for health science academic enhancements, faculty recruitment and program development. UA received its first payment in fiscal year 2015. Banner has also committed to funding $500 million in capital improvements, including a replacement hospital in Tucson.
The Banner deal created Arizona's largest private employer with more than 37,000 employees. Moreover, the transaction was designed to help the health network adjust to new federal healthcare laws that put enormous strain on some systems.
S&P analyst Laura Kuffler-Macdonald said a positive outlook or upgrade is unlikely over the two-year outlook period, due to UA's "low financial resources and considerable debt."
